Question:
In corporate finance, operating expenses and capital expenses are tracked separately. Total opex within a fiscal calendar goes against revenues to net at EBITDA. Capex is recorded as fixed assets and amortized over x years to net at net earnings. (I know I'm simplifying things.) Importantly, the company's treasury function provides funding for Capex through a mix of cash flow and issuing debt. This seems clean.My confusion is how this is reported (at least in public spheres) with governments. When we talk about a government's deficit, we seem to be including operating shortfalls (Opex or where existing programs spending is greater than revenues) plus Capex.
Say my government is running a $10B deficit and no change occurs in revenues and in program spending in the next fiscal year. If they propose a new infrastructure project (say railway) that will cost $$20B starting that year, what would be the deficit? I expect the $20B (assuming it actually stays at that level) would eventually be added to the accumulated debt but only the amortized allocation of it would be recorded as a part of the deficit.
Is that how it's supposed to be? Is that what they actually do? It seems the press never makes a distinction between these, which only confuses the public and obfuscates debate about spending.
Answer:
In your example, the infrastructure investment of $20B will be included in the next fiscal year expenditures in the full amount. Thus, the deficit during the next fiscal year will be $10B + $20B = $30B. Also, the debt level at the end of the next fiscal year will increase by $30B relative to that at the end of the current fiscal year.
A key reason why corporations account for operating expenses and capital investments differently is differential tax treatment (e.g., in the case of the corporate profit tax). In particular, a capital investment typically cannot be "expensed" in the same year it was made but must be amortized (for tax purposes). Since the government does not operate like a regular corporation and does not tax itself, broadly speaking, it does not face the same accounting issue. In a sense, the government "expenses" its capital investments in the same fiscal year they are made for the purpose of calculating the budget deficit during that year.
